Why Buy When You Can Lease?

As the purchase price and direct operating costs of civil helicopters continue to rise, leasing becomes more popular among operators.

By Robert W. Moorman

LCI-provided Weststar AW139.Photo courtesy of LCI

Leasing rotorcraft is in vogue. Owning a helicopter these days can be an expensive, long-term investment, according to several lessors.

“Most of the new operating leasing entrants focus mainly on the new mid to heavy turbine ships from the manufacturers, but the pre-owned marketplace is gaining traction as well,” notes Charles McGuire, managing director of Dallas-based Avstar Finance and chairman of the Helicopter Association International (HAI) finance and leasing committee.

The most obvious reason to choose an operating lease is that helicopters, particularly the larger, twin-engine, glass cockpit equipped variety, have become expensive.

In the 1980s and 90s, companies were leasing helicopters in the $2 million to $5 million range. Times have changed. With new larger rotorcraft costing between $15 million to $30 million per copy, “some of the operators don’t have the financial wherewithal to place orders with large deposits and finance these helicopters on their balance sheets,” explains Michael Platt, CEO of Lease Corporation International (LCI). The helicopter leasing division of LCI was established in 2012 with a $400 million order for AgustaWestland helicopters.

LCI is one of a growing number of well-capitalized lessors that have evolved. Some of the new guns providing operating lease agreements include: Milestone Aviation Group, Waypoint Leasing Ltd., and the Australian Macquarie Group, which launched a helicopter leasing unit in July 2013. Veteran lessor GE Capital Corporate Aircraft Finance continues to provide operating leases and debt financing for rotorcraft, which is what the company was known for initially. Dave Labrozzi, president of GE Capital Corporate Aircraft Finance, said the company “continues to see plenty of opportunities that meet our investment criteria.”

These companies are also filling a void. Several finance institutions have pulled out of the debt market for helicopters and traditional sources of capital seem reluctant to provide financing for the rotorcraft business they know little about.

Another point to consider: There are many old helicopters in service to day that need to be replaced. Leasing companies can help place new and slight used aircraft into the market, thereby allowing helicopter operators to continue to grow.

“We found that helicopters are great assets that the banks continue not to service,” notes Robert Dranitzke, Milestone’s managing director. “Our premise was that if we could provide 100 percent operating lease financing to high quality operators, than there would be a market for us.”

The end-result, at least on paper, looks like a win-win scenario for both operator and lessor. “By entering into an operating lease, they [the operator] has no asset exposure when their revenue ceases,” said Dranitzke. “If the contract is not renewed, the operator can hand the keys to Milestone and walk away,” he said. The lessee also doesn’t have to worry about the disposal of the helicopter, eliminating another risk.

Some executives tapped to run these leasing companies are aviation industry veterans. Jeff Pino, CEO of Macquarie Rotorcraft Leasing, is the former president of Sikorsky Aircraft Corporation. His chief marketing officer, Steve Estill, held positions at Bell/Textron and Sikorsky. Greg A’slinger, chief technical officer, is the former owner of Uniflight Inc., an authorized Bell Helicopter and Eurocopter customer service facility.

Milestone Chairman Richard Santulli, the founder and former chief executive of fractional ownership company NetJets, ran leasing company RTS Helicopters between the 1980s and 1990s. The company amassed 200 rotorcraft under lease during his tenure. Dranitzke and other Milestone executives came to Milestone from NetJets.

[Note: As of August 2013, the Macquarie Group was one of the final bidders to purchase the Royal Bank of Scotland’s aircraft leasing business. If the Macquarie Group wins, it would become a major player in both fixed-wing and rotary-wing aircraft leasing.]

Smaller lessors, such as Avinco have developed lease transactions for rotorcraft in order to facilitate its aircraft sales. Ten-year-old Avinco transacted over 220 helicopters with more than 50 percent on trade.

Helicopter operators serving energy companies are signing most of the operating leases for new equipment today. But lessors said they are expanding their market to helicopters that are used for search and rescue (SAR), emergency medical services (EMS) and electronic newsgathering (ENG).

“We not interested in the VIP market,” says Dranitzke. Corporate helicopters are idle much of the time and their acquisition and use typically depends on the health of the economy.

The move to increase borrowing capabilities and rotorcraft orders by some lessors seems to support the “putting-your-money-where-your-mouth-is” idiom. In August 2013, Milestone closed on a five-year, $600-million revolving credit line that included an unfunded revolving accordion feature to expand the borrowing capacity up to $750 million. Milestone said the debt facility would be used to fund growth initiatives and acquisitions.

In addition, the Export-Import Bank of the United States is providing a $187.4-million guarantee of a capital markets bond to finance the export of Sikorsky S-92s to the Milestone Aviation Group. Since its launch three years ago, Milestone has placed future firm helicopter orders and secured options valued at more than $2.2 billion. At present, Milestone has financial agreements with 22 helicopter operators.

This summer, LCI announced delivery of two AW139 helicopters worth more than $30 million to Malaysian operator Weststar Aviation Services in a long-term lease. The helos will be operated under contract to Tullow Oil’s offshore operations off the West Coast of Africa.

The rotorcraft are additional to the $400-million order announced by LCI in 2012 for new AW139, AW169 and AW189 helicopters, delivery of which has already begun. LCI’s helicopter fleet exceeds 40 delivered or on order. LCI has acquired fixed-wing and rotary wing aircraft worth an approximate value of $5 billion since its inception in 2004. The helicopter leasing division of LCI was established in 2012 with a $400 million order for AgustaWestland helicopters.

Waypoint Leasing secured $375 million of equity growth capital in May 2013 from funds affiliated with the MSD Capital, LP Soros Fund Management and Cartesian Capital Group. The investments will be used to drive expansion of Waypoint’s helicopter leasing operations worldwide.

In March 2013, Waypoint signed a multi-year, multi-aircraft agreement with AgustaWestland for new AW169, AW139 and AW189 helicopters. The agreement includes an initial acquisition of four helicopters, with options to purchase additional rotorcraft.

While the risk for operators is significantly reduced through an operating lease, lessors have taken steps to ensure that their assets are protected. Lessors require operators to be responsible for the line maintenance of the helicopters, typically through a power-by-the-hour program with the aircraft manufacturer.

“Operating leases with guaranteed maintenance programs offer the operator a stable budgeting environment, no long-term debt, and the ability to upgrade their fleet without being saddled with additional debt,” said David Wyndham, president and co-owner of Conklin & de Decker, an aviation information consultancy that tracks rotary and fixed-wing aircraft operating costs (see rotorcraft hourly costs chart).

To further reduce their risk, lessors perform a thorough risk assessment of the prospective client’s operation that involve a review of upper management, flight operations and maintenance records. The assessment could include a thorough analysis of the health and usage monitoring system (HUMS) data of some of the rotorcraft in the prospective client’s fleet. Some lessors might also check if the operator has had any problems with regulatory authorities.

OEM Benefit

Rotorcraft manufacturers are benefiting from the spike in leasing agreements, but it will take years before the percentage of rotorcraft leases match those of commercial airline fleets. Airlines have long embraced leasing as a viable means of acquiring lift.

“We always knew that the trend of leasing commercial airliners would come to helicopters,” said Fabrice Arfi, vice president business development & sales coordination for Eurocopter. “We also saw that the management structure of our traditional [helicopter] customers had changed and they had become more financially aware.”

In the commercial fixed-wing airline world, 33 percent of the fleet is on operating leases typically, according to various industry experts. One third of the airliner fleet is debt financed, while the rest of the aircraft are bought.

Arfi estimates that the large helicopter operators supporting the oil and gas business are getting close to having 20 percent of their fleets on operating leases, but noted that this was his opinion, and not from a study.

Helicopter operators will vary the financial management of their fleet, said Waypoint’s Washecka. Some aircraft will be financed through secured or unsecured debt, while other rotorcraft will be financed through operating leases and other equity arrangements. Rotor & Wing could not obtain specific details from large rotorcraft operators on how their fleet is financed.

Leasing provides OEMs other benefits. It has allowed Eurocopter, for instance, to offer standard configured rotorcraft for its oil and gas companies. This is a noteworthy change for Eurocopter, which was used to heavy customization of aircraft. In the last few years, Eurocopter adapted its assembly line to cope with more standard rotorcraft configurations. The OEM is looking for a “happy medium” to offer standard configurations plus customized rotorcraft, Arfi said.

OEMs are involved somewhat in direct leasing of rotorcraft. Vector Aerospace Financial Services, which Eurocopter acquired in 2011, offers customers operating leases on older rotorcraft on a “gap filler” basis until new Eurocopters are delivered. So far, Vector has handled two transactions of existing rotorcraft in the utility segment until delivery of the AS332 C1e Super Puma medium twin helicopters. Vector Financial Services complements Eurocopter Financial Services, which is limited in scope.

The concept of operating leases apply to helicopter operators of all sizes, but for now the business will remain mainly with those operators serving the oil and gas business or the energy companies themselves, lessors agreed. One principal reason why energy companies now look to leasing over buying is the growing cost of resource extraction. Oil and gas platforms in the Gulf of Mexico and elsewhere worldwide are being erected further from land. Which requires larger, more costly helicopters with greater range capability. Higher direct operating costs of those helicopters also have factored into leasing or buying debate.

Not everyone believes leasing rotorcraft is for now the domain of oil and gas business or offshore rescue. “The way to look at today’s [leasing] market is not to just specialize in heavy helicopters and offshore contracts, which in my view is too restrictive and risky,” says Francois Gautier, CEO of Avinco, which has operations in Monaco, Ireland and Germany.

According to Gautier, the real value of the assets would be achieved if the lessor “were able to adapt its machine usage and convert to other mission segments according to market and demand.”

That said, the energy companies would continue to provide significant revenue for lessors, but there are other energy producing regions that could benefit lessors, notes Gautier. At present, huge helicopter fleets support oil and gas operations in the North Sea, Brazil and the Gulf of Mexico. That market is somewhat saturated. Operators and lessors supporting energy companies should look to Russia, China, Indonesia and Africa, on and offshore, for new business opportunities.

Is leasing for everyone? No, replies Avstar’s McGuire. But leasing does offer options for the rotorcraft operators of all sizes that weren’t available in the recent past. Leasing is a proven vehicle to help provide helicopter operators with more lift and higher revenues. And that is good for business.

Government Rotorcraft Leasing

Leasing helicopters for government use cannot yet be categorized as a full-blown trend, but the concept represents a potential goldmine for financial services companies as well as a cost-effective means for governments anxious to relieve the burden on taxpayers.

Milestone Aviation Group, a prominent player in helicopter leasing, partnered with Bristow Helicopters on its successful bid to provide search and rescue services for the United Kingdom’s Coast Guard. Milestone said it is financing the majority of the Bristow helicopters.

In the U.S., there is already a significant business niche of helicopter companies operating on behalf of non-military related U.S. government agencies.

Some financial experts believe that sequestration, the U.S. law mandating massive budget cuts in government programs, as well as austerity programs by governments elsewhere could bolster the rotorcraft leasing business in the U.S. and various regions.

“There is going to be more opportunities for owner operators to enter into government contracting as a result of the fundamental changes going on in Washington,” said Chuck McGuire, managing director of Avstar Finance and chairman of the Helicopter Association International’s Finance and Leasing Committee.

Some governments are turning to operating leases as a viable way of lowering costs, but the move is typically linked to an outsourcing arrangement, such as what Bristow has with the United Kingdom government. The outsourcing program between Bristow and the UK is controversial. Critics are concerned about leaving important search and rescue to private sector companies, whose success or failure is determined by how much business they secure. Nevertheless, the practice is expected to continue for non-military, transport category aircraft.

Some cost-conscious governments could look to lease rotorcraft through private financial initiatives (PFIs), also known as private public procurements.

Recent developments in the United Kingdom could help boost rotorcraft leasing. In mid-September 2013, the UK Government announced the formation of a business finance partnership that would provide nearly £1 billion of new lending.
George Osborne, Chancellor of the Exchequer, the equivalent of the U.S. Department of the Treasury, said the BFP shows how the government is opening up new sources of finance for small and medium-sized businesses, including helicopter companies.

Bond Aviation, a helicopter air ambulance and search and rescue provider, based in Gloucester and Aberdeen, is one of the companies to have received BFP loans. Bond operates over 45 helicopters.

The Australian government is dabbling in leasing some of its rotorcraft. Bell Helicopter is partnering with Raytheon Australia for the Air 9000 Phase 7 Helicopter Advanced Training System (HATS) program. However, these aircraft will be owned, not leased by the Australian Defense Force. Bell declined to say how many 429s would be acquired for the Air 9000 HATS Program. In addition to program leader Raytheon, the HATS team includes Bell Helicopter, Milskil, Noval Systems and Virtual simulation Systems.

In a related development, Raytheon Australia purchased three Bell 429s from Bell Helicopter for the Retention Motivation Initiative 2 program.

Raytheon Australia operates these aircraft for the Royal Australian Navy on a lease basis.

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